Fresh ideas needed for startups to navigate Bharat

Zomato, which carries listings of more than 75,000 Indian restaurants, started food delivery services in April 2015 and has rapidly expanded.Anand J&Digbijay Mishra | TNN | January 16, 2016, 13:11 IST

At around noon on January 12, Anas Rahman Junaid was trying to order lunch online. Junaid lives and works in Kochi, the commercial capital of Kerala.

The city hosts Lulu, the largest shopping mall in India, and is flush with cash remittances and investments from non-resident Keralites and those who have returned to the state from all over the world. Kochi has a population of around 20 lakh, accounting for the area that is also part of its urban sprawl. Junaid was using Zomato, the country’s largest aggregator of restaurants to get lunch for himself.

Zomato, which carries listings of more than 75,000 Indian restaurants on its apps and website, started food delivery services in April 2015 and has rapidly expanded this service to 14 cities — each with a population of more than 10 lakh (according to the 2011 census, the country has 53 such cities.)

Junaid’s order did not go through. After grabbing a bite elsewhere, he tried looking for reasons behind the failure of the order. To his amazement, he found Zomato had stopped taking delivery orders or Kochi, Coimbatore, Lucknow and Indore. Kochi and Coimbatore are cities with high literacy rates, high smartphone penetration and good disposable incomes.

Kochi has a plethora of fine dining restaurants, probably giving Zomato good enough margins on delivery, says Junaid, who is a partner with Nash Capital Partners, and the editor of Hurun Report, which publishes the Indian rich list.

What led to Zomato shutting delivery operations in these cities, where it ran the service for six months? Well, it was not the only venture to pull out of a tier-2 city. This month alone, hyperlocal grocery delivery service Grofers shut down operations in nine cities including Bhopal, Bhubaneswar, Coimbatore, Kochi, Ludhiana, Mysuru, Nashik, Rajkot and Visakhapatnam.

Other online food delivery firms like Foodpanda and TinyOwl, which had offered heavy discounts to their consumers, have also shut operations in many relatively smaller cities. Both Grofers and Zomato cite the same reasons: that the size of the market in these cities is small at present and they may come back when the timing is right. Zomato says these four cities contributed less than 2% of its sales.

This coincides with the heavy growth rates of e-commerce firms like Flipkart, Amazon and Snapdeal in cities with a population of 10 lakh and above. Along with other smaller cities, these “10-lakh” or “one million” cities now contribute to almost 60% of their overall sales.

Where did they go wrong?

As Zomato, Grofers et al learnt, food is a perishable commodity. There have to be enough restaurants in a city for consumers to order food from; you can’t ship food which is not available in the city and deliver it to a consumer for lunch — unlike the online shopping industry.

“Unlike e-commerce players who offer consumers in tier-2 and 3 cities products they might not have access to locally, in hyper local businesses such as food or grocery delivery, it is important to have enough supply (a large base of restaurants or grocery stores), even if you were to create significant demand,” says Pankaj Chaddah, Zomato co-founder.

Experts feel that there might not be a big enough market in many of these onemillion cities in the next few years. Mohan Kumar, partner at Norwest Venture Partners, says, “The hectic lifestyle of customers in big metros forces them to order food and groceries online. They are mostly migrants unfamiliar with the city and have long and unpredictable work hours.” He adds that in smaller cities, people have local help and families to take care of these issues.

Even taxi aggregators have had to face chicken-egg issues associated with demand. For instance, a cab would not get a fresh booking from the drop-off location and would have to move to a new location to pick up the next customer.

However, Ola has been a runaway success in small towns, says a company spokesperson. The cab aggregator is present in 102 cities in India today, up from just about 10-20 at the end of 2014. “Till we entered, there was no organized mode of transport in most of the smaller cities. We are seeing two-digit, three-digit rates of growth month-on-month. In cities like Jaipur, Trichy, Vijayawada,we are doing extremely well,” the spokesperson said.

Some investors also say that unlike metros, smaller cities do not have major traffic issues. While people in metros love eating out, the traffic forces them to order online from their favourite restaurants, whereas in smaller cities it’s easier to hop across to an eatery. Mukul Singhal, an investor at Saif Partners, feels that the market has many more lessons to offer on how to keep consumers glued, apart from using discounts as a lure. “Logistics and demand also take a toll on cost. All these things are still being figured out,” he adds.

BACK TO THE BASICS

Hari Menon, co-founder and CEO of online grocery firm BigBasket, feels that the companies erred in trying to replicate the metro model in the one-million cities. “Convenience is not the pain point we are addressing in smaller cities,” he says.

BigBasket is inventory-based and offers the same advantages as e-commerce companies — a wider range of products and things that are not available locally. Its USP is not one-hour express delivery, which it does offer in metros. “In small towns, users will just walk out of their house and get the stuff quicker, so that’s really not a selling point,” adds Menon.

However, he remains optimistic. He says companies that failed to create a stir in smaller towns the first time around need to fine-tune their strategies and make use of advantages offered by non-metro markets. “Hiring, real estate and other operational costs are lower, apart from shorter distances. You need to design a mechanism where you can be profitable at a fewer number of orders,” says Menon. You need to be more patient as the aspirational smalltown Indian will want these services, he adds.

Play the waiting game?

Speaking in a personal capacity, Junaid of Hurun says that startups could not play the waiting game as investors became concerned about the cash-burn rate and withdrew operations from these cities.

“They want to focus their resources in metros where they have a better chance of making profits more quickly,” he says, adding, “However, the markets won’t remain untapped.” There are already a few local players aggregating many restaurants in Kochi, says Junaid. Chaddah of Zomato has promised to re-enter these cities later. Junaid predicts that the re-entry will take place by acquiring smaller local players.